Roni Deutch Explains the Bush Tax Cuts

The Economic Growth and Tax Relief Reconciliation Act of 2001, and the Jobs and Growth Tax Relief Reconciliation Act of 2003, are the two pieces of legislation that are commonly referred to as the Bush tax cuts. They offer different forms of relief to most taxpayers in this country, and have been getting plenty of attention in the media as pressure mounts on Congress to either extend the tax laws, or let them expire at the end of the year.



Tax Rates and Incentives



The two pieces of legislation from the early 2000’s had a handful of effects on U.S. tax law. They reduced the "marriage penalty," provided incentives to parents and low income working Americans, and also increased credits for education and retirement saving accounts. Most importantly, however the cuts reduced tax rates across the board. The Economic Growth and Tax Relief Reconciliation Act created six tax brackets based on income level (10%, 15%, 25%, 28%, 33%, and 35%). If the laws expire, the 10% bracket would disappear, and the brackets would revert back to 15%, 28%, 31%, 36% and 39.6%. This would represent an increase for nearly all Americans who pay taxes. Additionally, changes to itemized deduction phase outs could eliminate up to 80% of deductions for higher income taxpayers.



Capital Gains and Qualified Dividends



The 2001 and 2003 tax cuts also reduced the maximum tax rate on capital gains and qualified dividends from 20% to 15%. If allowed to expire, the top capital gains rate would return to 20% and qualified dividends would be taxed at the same rate as a taxpayer’s income, or up to 39.6%.



Looming Expiration



Unless extended, the Bush tax cuts are scheduled to expire at the end of the year. If Congress fails to act before they take their winter break, then the tax rates will automatically revert to what they were in 2000. Some experts are asserting that extending all of the cuts would provide a temporary economic stimulus, however the Congressional Budget Office asserts doing so would only have a slight impact on the economy. Others are warning that letting all the tax cuts expire could hurt small business owners, and hinder job creation.



Obama's Proposal



Instead of choosing to extend the cuts, or let them all expire, the White House has proposed a compromise. President Obama would like to extend all of the cuts for low and middle income Americans, while letting the cuts that impact taxpayers making over $200,000 ($250,000 for joint filers) expire.



Small Businesses and Job Creation



One of the most confusing aspects of the Bush tax cuts is how they will affect business owners, and the ongoing unemployment problem in this country. Many conservative experts have argued that even letting only the cuts that affect high-income taxpayers would hurt the recovering economy. Senator Orrin Hatch even said that allowing the cuts to expire would amount to "a job-killing tax hike on small business during tough economic times."



This statement is somewhat misleading. We can assume that a business owner making over $200,000 does not own a mom-and-pop store in a struggling neighborhood. Although 24% of taxpayers report some income from a business, only about 2.5% of Americans – or 900,000 taxpayers – would be affected Obama’s proposal. However, that 2.5% reports an estimated $400 billion in income, or nearly 44% of all business income in the country.



The Tax Lady Roni Deutch and her law firm Roni Deutch, A Professional Tax Corporation have been helping taxpayers across the nation find IRS tax relief for over seventeen years. The firm has experienced tax lawyers who can fight tax debts on your behalf.